An Associated Press story recently concluded that U.S. has spent $1 trillion over 40 years on the war on illicit drugs, but there is no end in sight. The use of illicit drugs like marijuana, cocaine and methamphetamine (meth and/or crystal meth), and the accompanying violence, corruption and adverse health outcomes for the users still continues to grow. It appears that the supply side strategy has not worked.
Basic economic reasoning informs us that in any market, legal or illegal, the price and quantity bought and sold depends on supply and demand. Suppliers are driven by profit motive and are willing to supply more as price rises. The consumers want to buy the product because it gives them satisfaction and they are willing to buy more if the price falls. The transaction between buyers and sellers takes place at an agreed upon price. The price rises if demand increases more than supply and falls if supply increases more than increase in demand. Markets will thrive as long as there is a demand for illicit drugs and profits can be earned.
The prices of illicit drugs may change not only due to changes in their own demand and supply conditions, but also changes in prices of other illicit drugs. For example, if the marijuana price increases relative to cocaine prices, many consumers may switch to cocaine, hence increasing cocaine price as well.
Illicit drug markets are highly profitable. For example, the National Institute of Drug Abuse estimates that powder cocaine typically sells for $100 to $125 per gram, but costs $9 to $40 per gram. Prices and costs vary by locations. As profits increase we expect more entry by suppliers. In fact, wholesale suppliers have an incentive to spread addiction among the general population through an attractive pricing policy so they can increase their retail outlets, because each addict is a potential retailer.
Selling drugs at the retail level becomes an attractive option, especially among those who have less employment and earning opportunities in legal trades. In 2005, a UN report estimated that the worth of global drug markets is close to $320 billion per year. Reducing the flow of the supply by catching a few kingpins in the trade will not stop the flow because their places are filled by others waiting for the opportunity to enter lucrative markets. The risks are great but so are profits. There is also a tendency to use violent methods to monopolize the trade. Monopoly power gives the seller pricing power and a larger market share and hence more profit.
The supply side policy also results in many adverse societal side effects. In addition to law enforcement and judicial costs, it has increased the prison population at huge expense to taxpayers, thus depriving resources from socially beneficial programs. Violence is the natural outcome when competing suppliers attempt to squeeze others out from their markets. Violence also spills over to the general population, thus paralyzing other legal economic activities. An exhaustive review of scientific studies by the International Center for Science in Drug Policy confirms the association of violence and prohibition of drugs around the world.
Corruption of law enforcement personnel, politicians and judicial officials is another side effect of supply side policies. A study in 2008 by Edgardo Buscaglia, Columbia Law School, found that expected severe punishment without eliminating assets and supporting networks of organized crime leaves the criminals with the ability to finance continued and expanded corruption.
What can be done to minimize the drug problem? Make the trade unprofitable, legalize drugs with appropriate regulations on suppliers and consumers just like we regulate medical drugs. Tax drugs and dedicate that revenue and other savings from enforcement, judicial systems and prisons to educate children and adults about the harmful effects of drugs on health and general well being and treat those who are addicted.
The education process has to start early in childhood. Increased competition in the open market will dry up profit to organized crime and at the same time start us on the path of declining demand. The demand-based strategy is not made to condone negative behavior, but rather to change behavior. It is not claimed that this strategy will eliminate the black market in drugs, but it will minimize it. We still have a black market in legal and addictive medical drugs like Ritalin, Oxycontin.
Economist and Nobel Laureate Milton Friedman stated in Hoover Digest in 1998, "Compared with the returns from traditional career of study and hard work, returns from dealing drugs are tempting to young and old alike. And many, especially the young, are not dissuaded by the bullets that fly so freely in disputes between competing drug dealers -- bullets that fly only because dealing drugs is illegal. Al Capone epitomizes our earlier attempt at Prohibition; Crips and Bloods epitomize this one."
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden. His articles also appear at vijaykmathur.blogspot.com.